Luciano Benetton, the Italian textile magnate, has agreed to give up 2,500 hectares (6,200 acres) of land in Argentina to end an indigenous land rights controversy which risked wrecking his company's caring image.

Mr Benetton said he was putting the land at the disposal of Argentina's Nobel peace prize winner, Adolfo Pérez Esquivel, whose campaign against the fashion house gave the row worldwide prominence.

The concession was announced two days before a meeting of Nobel laureates in Rome which would have given Mr Pérez Esquivel a fresh opportunity to embarrass the Benettons.

In July Mr Pérez Esquivel published an open letter criticising Mr Benetton over his eviction of a family of Mapuche Indians.

The case, which has become a cause celebre in Argentina, showed the clothing tycoon had "the same mentality as the conquistadores", he said.

The Benettons are the biggest landowners in Patagonia, from where the company gets 10% of its wool.

Much of the land now owned by the company was seized from indigenous farmers in a bloody military campaign at the end of the 19th century.

The Benettons' role in this injustice came to light two years ago after a Mapuche couple, Atilio Curinanco and Rosa Naheulquir, settled with their four children on an unfarmed plot in Chubut province of Patagonia. Less than two months later they were evicted by the police and their plough and oxen seized.

Supporters said their ancestral rights took precedence over the Benettons' documented ownership. But in May a judge backed the Benettons and the controversy was given fresh life.

After Mr Pérez Esquivel's letter was published in Italy, Mr Benetton agreed to meet the Nobel laureate but insisted on his family's right to the property.

A statement issued from the family's home town of Treviso near Venice said the "good-quality, productive", land was being put at Mr Pérez Esquivel's disposal because of his "recognised integrity and profound knowledge of the situation in Patagonia". He was free to "put it to the use he deemed most opportune".

The statement said it was "a substantive yet at the same time symbolic act [intended as a] contribution to the coexistence of the various peoples of Patagonia".

A statement by Mr Pérez Esquivel's Buenos Aires-based Foundation for the Service of Peace and Justice yesterday said: "No one can be a guarantor of lands that always belonged to the Mapuche. The Mapuche concerned have travelled to Italy, they are the ones who must decide whether to accept this offer."

The land at the centre of the dispute does not form part of the property on offer. But it covers an area more than six times bigger. Even so, it accounts for no more than a fraction of the Benettons' overall holding.

In 1991 the family holding company bought up an Argentinian firm, Compania de Tierras Sud Argentino, that had the title to some 900,000 hectares (2.2m acres).

Since then, Benetton said, it had revived a business in decline which now employs 600 people.

The company now grazes 280,000 sheep on land in Patagonia which supplies 10% of its production.

It has invested $30m (£16m) in genetic research and development, forestry, mining and social and cultural projects.

The titles acquired by Benetton are disputed by the Mapuche and their lawyers. Their ancestral land claims predate the foundation of the Argentinian state.

As the owner of 9% of the prime land of Argentinian Patagonia Benetton has tried to act as an environmentally and culturally sensitive neighbour.

It invested $800,000 in the Leleque Museum, which "narrates 13,000 years of history and culture of a mythical land" through archaeological remains, testimonies, documents and photographs of the Mapuche and Tehuelche Patagonian populations that, it says, relate "their conflicts, beliefs, and religious rites".